Illinois business and residential electric customers have no doubt seen a lot of news stories recently about a program known as "municipal aggregation" or "opt-out aggregation," which purports to save customers money on their electric bill. While these programs may provide a marginal amount of savings versus the above-market rate charged by ComEd or Ameren, these municipal aggregations do not maximize savings for customers, and worse, keep customers from shopping for more advantageous rates.
At its core, municipal aggregation is government-sponsored "slamming" -- or the switching of customers to a new electric supplier that the customer has not affirmatively chosen. All the residential and commercial electric customers in a town are automatically pooled together, unless the customer affirmatively "opts out" and chooses their own electric supplier.
For customers not opting out, the town selects a new energy supplier, replacing the utility, at the town's discretion, and all customers are switched to this new energy supplier. Often, customers are then locked into a long-term agreement with the aggregation pool, and cannot later leave the aggregation for a set period (such as 12 months) if the customer finds a cheaper price, or may only do so if they pay an exit fee.
Legislation in Illinois, and states including Ohio, New Jersey, and Massachusetts, allows cities and towns to engage in such aggregation activity even though it would be considered slamming if anyone else did it. The authority is premised on the notion that municipal aggregation can save customers money; but larger energy savings are available from shopping around independently.
The stories behind municipal aggregation sound good: savings are promised by leveraging the buying power of groups of customers, and by making it less costly for competing energy suppliers to acquire customers. However, while there is some truth to these concepts, the reality is that these advantages are not unique to municipal aggregations, and customers can receive even lower energy rates by shopping for their electric supplier.
Take for example, the argument that municipal aggregations lower costs because energy suppliers don't have to spend money "finding" customers by engaging in costly marketing or advertising. This is true, and suppliers can offer lower rates as a result. However, this isn't unique to municipal aggregations. Any customer that comes to the energy supplier, unprompted by marketing, saves the supplier "acquisition costs."
Next, consider the argument that pooling all customers together through an aggregation lowers prices. Again, in theory, this sounds right, but the reality is a bit different in the electric industry. While extremely large loads may receive more favorable pricing, the reality is that when an electric supplier signs up an individual customer, the load of that customer is usually so small that the load, by itself, cannot be "hedged" -- hedging providers in the wholesale market will only offer to hedge a threshold amount of load (such as a certain amount of megawatts).
Because retail electric suppliers still need to hedge these smaller customers which they cannot hedge individually, they essentially "pre-aggregate" their expected enrollments for a given period of time, and suppliers are constantly managing much larger hedging portfolios for supply. The bottom line is that because these suppliers are already forced to aggregate their expected load for hedging purposes, there is little incremental benefit from aggregating customers in a municipality together. In other words, the "buying power" of aggregation is already reflected in the retail rates available through some marketplace websites and do not result from municipal aggregation.
Finally, customers, especially business customers, need to remember that the aggregation price is a "one size fits all" price -- just like the plain vanilla utility rate. While aggregations will provide separate residential and commercial electricity rates, they lump all commercial customers into one buying pool, which results in cross subsidization among different customer types and electricity users.
Under municipal aggregation, for example, customers with high load factors are not rewarded with a lower price for using electricity efficiently. Businesses which use more power in off-peak times when electricity is cheaper, such as nights, also aren't rewarded, and must pay the same flat, average rate as the customers who cause costs to be higher during peak times.
Every customer uses power differently, which is where the true savings from electric choice come from. Competing energy suppliers can customize their offers and tailor their rates to maximize the customer's benefits based on the customer's individual usage and load patterns. This is one of the many ways customers save money by receiving customized offers from several competing electric suppliers. In contrast, municipal aggregations average everyone's electric costs, denying customers the savings from their unique electric usage and requirements.
It's clear that electric rates lower than the municipal aggregation rates are available to Illinois customers (one electric supplier recently touted this fact in a press release). However, customers must be vigilant, especially since once customers are included in the aggregation, they may be prevented for leaving for 12 months.
Because the aggregations are "opt-out" programs, customers need to be sure that they are not automatically locked into the program. Unfortunately, customers are only given a brief period to exercise their "opt out" right before being locked into the aggregation (perhaps 30 or 60 days, depending on jurisdiction). Worse, the opt-out periods are not well publicized, and are mainly announced through 1 or 2 mailings notifying customers of their impending inclusion in the aggregation absent an opt-out. Such mailings are often not recognized by customers and are discarded as junk mail -- because most customers naturally don't think their electric supplier will be changed simply because the customer did not answer a piece of mail. However, that is the new reality in Illinois and other states with municipal aggregation, which can keep customers from getting the lowest electric rate.